Sarabjit Singh (instructed by the General Counsel and Solicitor to HM Revenue and Customs) for the Respondents

Hearing dates : 27-29 June 2017

- - - - - - - - - - - - - - - - - - - - -

Lord Justice Patten :

The common system of value added tax (VAT) was introduced into the EC as a general tax on the supply of goods and services. It is calculated by reference to the price of the goods and services in question and operates irrespective of the number of transactions which take place in the production and distribution process before the stage at which tax is charged. The tax is payable by the person making the supply after the deduction of the amount of VAT borne directly by the various cost components of the supply.

These basic features of VAT were first set out in Article 2 of the First Council Directive of 11 April 1967 (67/227/EEC) which explained in its recitals the need to achieve harmonisation in turnover taxes and to eliminate, as far as possible, factors which may distort competition. This included the perceived need to harmonise both rates of and exemptions from tax across the EC. The effect on competition of exemptions from VAT was recognised in the Second Council Directive of 11 April 1967 (67/228/EEC) which recited that:

``Whereas the system of value added tax makes it possible, where appropriate, for social and economic reasons, to effect reductions or increases in the tax burden on certain goods and services by means of a differentiation in the rates, but the introduction of zero rates gives rise to difficulties, so that it is highly desirable to limit strictly the number of exemptions and to make the reductions considered necessary by applying reduced rates which are high enough to permit in normal circumstances the deduction of the tax paid at the preceding stage, which moreover achieves in general the same result as that at present obtained by the application of exemptions in cumulative multistage systems;''

Article 10 of the Second Directive exempted the supply of goods and services to places outside the relevant member state and the importation of goods and services. But member states also retained the right to determine the other exemptions which they considered necessary. The Second Directive was not more specific than that in identifying what other exemptions might be granted. Provisions for exemption from VAT have been carried through to the Principal VAT Directive (PVD) (2006/112/EC) but are now set out in considerably more detail than in the original EC legislation. In Article 132 one finds what are described as exemptions for certain activities in the public interest. These include in Article 132(1)(i):

``the provision of children's or young people's education, school or university education, vocational training or retraining, including the supply of services and of goods closely related thereto, by bodies governed by public law having such as their aim or by other organisations recognised by the Member State concerned as having similar objects;''

The exemptions provided for in Article 132 are stated in Article 131 to apply:

``without prejudice to other Community provisions and in accordance with conditions which the Member States shall lay down for the purposes of ensuring the correct and straightforward application of those exemptions and of preventing any possible evasion, avoidance or abuse.''

Examples of the type of conditions which a member state might choose to impose are contained in Article 133. These relate to exemptions conferred on bodies other than those governed by public law and therefore to the ``other organisations'' referred to in Article 132(1)(i) above. They include the requirement that the body in question should not systematically aim to make a profit; should be managed and administered on an essentially voluntary basis and should charge prices which are approved by public authorities or which do not exceed such approved prices; or must not be likely to cause distortion of competition to the disadvantage of commercial enterprises subject to VAT.

The United Kingdom has chosen to implement Article 132(1)(i) not by imposing one or more of the Article 133 conditions but by identifying in domestic legislation the public or other bodies which it recognises as qualifying under Article 132(1)(i). Exempt supplies of goods and services within the United Kingdom are specified in Schedule 9 to the Value Added Tax Act 1994 (VATA 1994). The exemptions relating to education are contained in Group 6. Item 1 is:

``The provision by an eligible body of--

(a) education...''

``Eligible body'' is defined in Note (1). It includes a long list of different types of school and higher education establishments but we are concerned on this appeal with paragraph (b):

``a United Kingdom university, and any college, institution, school or hall of such a university;''

The issue on this appeal is whether SAE Education Limited (``SEL'') was properly assessed to VAT for the periods from 1 May 2009 to 29 February 2012 in respect of supplies of education. It claims that the supplies were exempt on the basis that, since at least 1 May 2009, it has been a college of Middlesex University (``MU'') and therefore an eligible body within the meaning of Item 1 of Group 6. The First-tier Tribunal (``F-tT'') (Judge Clark and Dr James MBE) allowed its appeal against the assessments but its decision was reversed by the Upper Tribunal (Tax and Chancery Chamber) (``the Upper Tribunal'') (Judge Colin Bishopp and Judge Guy Brannan) in a decision released on 25 April 2016: [2016] UKUT 193 (TCC).

The decision of the Upper Tribunal is challenged on a number of different grounds including that the Upper Tribunal was wrong to interfere with what was a multi-factorial assessment by the F-tT that could not be said to be wrong as a matter of law. But the principal reason that permission for a second appeal has been granted by the Upper Tribunal is to allow the meaning of the phrase ``college of a university'' to be considered by the Court of Appeal and I propose to begin with this issue.

VAT was introduced in the UK by the Finance Act 1972 (FA 1972) and became chargeable on 1 April 1973. Exempt supplies were those set out in Schedule 5 to the 1972 Act which included as Group 6, Item 1:

``The provision of education if--

(a) it is provided by a school or university ; or

(b) it is of a kind provided by a school or university and is provided otherwise than for profit.''

Note (3) to Item 1 provided a definition of ``university'' in these terms:

``"University" includes a university college and the college, school or hall of a university.''

At the time these provisions came into effect the relevant EC provisions on exemptions were those contained in Article 10 of the Second Directive which, as mentioned earlier, gave each member state (subject to consultations with the EC Commission) a broad discretion as to what other exemptions to create. The language of Item 1 in FA 1972 was not therefore intended to transpose equivalent provisions in the Directive into domestic law and it must be taken to represent what Parliament considered in 1972 should constitute the scope of the exemption for the supply of education by a ``university''.

The phrase ``college, school or hall of a university'' has an obvious meaning in the context of UK universities as they operated in 1972. Both Oxford and Cambridge (to take the most obvious examples of universities which operate on a collegiate basis) have been organised for centuries on a federal system under which the colleges and private halls, although legally independent and self-governing, have provided the undergraduate and graduate students of the university and have assumed the primary responsibility for their tuition. The universities themselves are corporations now regulated by statute with their own separate legal identity and status. Their statutes govern such matters as admission to degrees, the giving of lectures and student discipline. The universities remain responsible for the administration of their academic and research departments but operate in terms of governance through Congregation (in the case of Oxford) and the Regent House (in the case of Cambridge) which are made up of university officers, heads and fellows of the colleges; and other academic, research and administrative staff. In each case the governing body of the university has the power to amend its statutes and regulations and to determine policy issues affecting the operation of the university. The colleges and private halls are therefore an integral part of the structure of the university and their members make up the university's teaching staff and students. No student member of a college or hall is not a member of the university or takes a course of study which does not, if successful, lead to the conferment of a university degree.

The system which I have described is mirrored in the Education (Listed Bodies) (England) Order 2010 (``the 2010 Order'') which contains a schedule of the bodies and other organisations which are authorised to grant recognised awards as defined by s.214(2) of the Education Reform Act 1988 (``the 1988 Act''). The Act makes it an offence to grant or offer to grant a degree that is not a recognised award. Section 214(2) defines a ``recognised award'' as:

``(a) any award granted or to be granted by a university, college or other body which is authorised...